BUDGET

Budget is a statement of estimated receipts and expenditure of the government

for the ensuing fiscal year (i.e. 1 April to 31st March). It is also known as 'Annual
Financial Statement'. As per article 112 of the constitution, the President shall cause to
be laid
a financial statement before both the Houses of Parliament at the commencement of
every financial year of the estimated receipts and expenditure of the government for that
year. Article 202 of the constitution provides that a similar financial statement for each
state will be placed before the legislature of the respective state.
The annual budget statement presents four kinds of estimates:
(1) Actual estimates of the preceding year
(2) Budget estimates of the current year
(3) Revised estimates of the current year
(4) Budget estimates for the proceeding year
The budget shows the receipts and expenditure of the government (centre and states)
under three heads:
(1) Consolidated Fund:- It is the main account of the government and it consists of all
the receipts of the government from taxes, loans and other receipts. No amount can be
spent without prior sanction of the Parliament (or state legislature).
(2) Contigency Fund:- It consists of the sum placed at the disposal of the President to
meet unforeseen expenditure. The prior sanction of the Parliament or state legislature is
not required under this fund but it is sought to replenish the fund.
(3) Public Account:- It consists of all receipts and payments which are in the nature of a
deposit account with the government such as small savings, provident funds etc. No
legislative sanction is required for withdrawal of money from this fund as it does not
belong to the government and comes under the public account.
The presentation of Budget is followed by a general discussion on it in both the
Houses of Parliament. Estimates of expenditure from the Consolidated Fund of India
are placed before the Lok Sabha in the form of 'Demand of Grants’. All withdrawals of
money from the consolidated Fund are therefore authorized by an appropriation Act
passed by the Parliament every year. Tax proposals of the budget are embodied in a bill
which is passed as the 'Finance Act' of the year. Estimate of receipts and expenditure
are similarly presented by the state governments in their legislature before the beginning
of the financial year.

Union Finance Minister's speech:- Finance minister's speech gives a broad overview
of the Budget proposals. Generally it is in two parts. The first deals with a review of
implementation of the preceding year's schemes, revised estimates for the completed
year and the budget estimate for the next year, without taking into account the impact of
budget proposals. Part two of the speech deals with revenue mobilization through tax
proposals.
Annual Financial Statement :- Annual Financial Statement (AFS) is the main Budget
document. Under Article 112 of the Constitution, a statement of estimated receipts and
expenditure of the Government of India has to be laid before the Parliament in respect of
every financial year from 1 April to 31 March. It shows the receipts and payments of
government under three accounts - Consolidated Fund, Contingency Fund and the
Public Account.
Demands for Grants:- The estimates of expenditure from the Consolidated Fund,
included in the Annual Financial Statement and required to be voted by the Lok Sabha,

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are submitted in the form of Demands for Grants in pursuance of article 113 of the
Constitution. Generally, one Demand for Grant is presented in respect of each ministry
or department.
Budget at a glance:- The Budget at a glance gives an overview of the budgetary
proposals. It gives a break up of tax and other receipts as well as expenditures (plan and
non-plan), allocations of outlays by ministries and resource transfers to states and UTs,
the projections on revenue deficit, fiscal deficit and primary deficit, ,etc.
Finance Bill:- The proposals of government for levy of new taxes, modification of the
existing tax structure or continuance of the existing tax structure are submitted to the
Parliament through the Finance Bill. To facilitate easy comprehension of the budget,
certain explanatory documents are presented along with the budget.
Appropriation Bill:- After the Lok Sabha votes on the Demands for Grants, Parliament's
approval to the withdrawal from the Consolidated Fund of the amounts so voted and of
the amount required to meet the expenditure 'charged' on the Consolidated Fund is
sought through the Appropriation Bill.

Structure of the Budget

Structure of the Budget refers to the components of the budget. It has two broad
components:(a) Budget Receipts (b) Budget Expenditure.
(a) Budget Receipts refer to estimated money receipts of the government from all
sources during the fiscal year. Broadly, the budget receipts are classified as:
(i) Revenue Receipts:-Such receipts accrue to the government on account of its current
activities and are generally recurrent in
nature. For example tax receipts like income tax, excise tax etc. and non-tax revenue
receipts like income from PSUs, interest received etc.
(ii) Capital Receipts:- Such receipts either create liabilities (like borrowings) or reduce
assets like disinvestment, recovery of loans etc.
(b) Budget Expenditure:- refers to the estimated expenditure of the government on its
developmental and non-developmental programmes (or on its plan and non-plan
programmes) during the fiscal year. Budget expenditure is also classified into two broad
categories:
(i) Revenue Expenditure:- Such expenditure is incurred on day-to-day activities of the
government and neither create assets nor reduce liabilities eg. interest payments,
subsidies etc.
(ii) Capital Expenditure:- Such expenditure either creates asset or reduces liability of the
government eg. expenditure on construction of road, bridge, building etc.

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Zero Based Budgeting (ZBB): This concept was propounded by Peter Phyrr. Under
this the financial requirements of various departments are analysed, evaluated and
justified annually afresh i.e. on the assumption that there was no budget in the earlier
years. Thus each head of expenditure is justified on its merit and unnecessary terns
continuing from the past are discontinued. It has been adopted in India since 1987 as a
means to control public expenditure.
Performance (and Programme) Budgeting : A budget which presents the purpose for
which funds are required, cost of programmes proposed and quantitative criteria for
measuring the accomplishments under each programme. India adopted performance
budgeting In 1969. Since then performance budgets for various departments are
prepared and submitted to parliament as supplementary documents to the traditional
budget.
Outcome Budget 2005-06
The Union Finance Minister, Mr. P. Chidambaram presented the first ever outcome
Budget 2005-06 on August 25, 2005 in the Parliament. The 723 page document, is a
compilation of the intended and anticipated outcomes, as identified by the 44 Ministries
and their respective departments, sought to be achieved through the allocations made in
the Budget for the current fiscal. It excludes the targets of nine Ministries such as Atomic
Energy, Defence, External Affairs and Parliamentary Affairs.
Outcome Budget
An outcome budget is a variant of performance budget. It is an exercise of converting
the financial outlays into physical outcomes, with fixed quarterly measurable and
monitorable targets, to improve the quality of implementation of developmental
programmes. The outcome budget measures the development outcomes of all
government programmes. For instance it will tell a citizen if money has been allocated

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for building a primary health care, whether the centre has indeed come up. In other
words, it is a means to develop a linkage between the money spent by a government
and the results which follow.

1. BUDGET DEFICIT
The budget deficit is the difference between the total expenditure and total receipts,
other than internal capital receipts. It has to be financed through the sale of 91 day ad-
hoc treasury bills to the RBI and drawing down of cash balances. Budget Deficit = Total
Expenditure — Total Receipts = 91 day adhoc treasury bills + cash withdrawals
The issue of 91 day adhoc treasury bills leads to the monetisation of the deficit (i.e.
printirig of new money), so government abandoned the practice of issuing such
securities to the RBI since 1997. Instead, the government had initiated a scheme of
Ways and Means Advances (WMA). Thus, the concept of budget deficit had become
redundantin India.

Ways and Means Advances (WMA) : Under this scheme, the RBI, provides facilities for
temporary accommodation of the financial needs of the government up to a ceiling.
Now, yearly limits are divided into six months each, decided mutually between the
government and the RBI at the beginning of a year. Thus, the WMA is purely a
mechanism to bridge the temporary mismatch between the receipts and expenditure of
.the government

2. Revenue Deficit (R.D.)

Revenue deficit is the excess of revenue expenditure over revenue receipts i.e.
R.D. = Revenue expenditure - Revenue receipts
Revenue deficit shows the extent of reduction of assets or increment in liabilities of the
government. In simple terms, it can be understood as the excess of current consumption
expenditure of the government (which does not yield any future benefit) over its current
income. So, it is regarded as the worst kind of deficit from the perspective of economic
welfare.

3. Fiscal Deficit (FD)

Fiscal deficit is the excess of total expenditure of the government over the total receipts
other than borrowings i.e:-
FD = Total Expenditure — Total receipts other than borrowings
In other words, it can be defined as the difference between the total expenditure on one
hand and the revenue receipts plus non-debt creating capital receipts on the other, i.e.
FD = (Total Expenditure) — (Revenue Receipts + Non-debt creating capital receipts)
Fiscal deficit shows the extent of increment in public debt (i.e. total borrowings) during a
fiscal year. It is the most comprehensive measure of deficit as it depicts the total
resource gap of the government budget.

Crowding Out:-It refers to the reduction in private investment as a result of high interest
rates due to excessive government borrowings.

4. Primary Deficit
Primary deficit is the difference between the fiscal deficit and interest payments i.e.

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P.D. = Fiscal Deficit — Interest Payments It reflects the status of the current operations
of the government. That is, the extent to which current government policy is adding to
future burdens stemming from past policy.

5. Monetised Deficit
It is also called Deficit Financing. It is defined as the net increase in RBI credit to the
government during a fiscal year. Government borrowings from RBI directly add to high
powered money i.e. printing of new money. It deficits the increase in the high powered
money and leads to a multiple expansion in money supply, which generates inflation.
Monetised Deficit is only a part of fiscal deficit as it takes into account borrowings of the
government only from the RBI.

Fringe Benefit Tax (FBT):-It was introduced in the Budget 2005-06. It is levied at a rate
of 30% on the employer on the benefits (perquisites) which are collectively provided to
the employees eg. Tour and travel, Entertainment, Maintenance of Guest House etc.
Service Tax:- Service Tax was first imposed in 1994 on telecom, insurance and stock
broking. Service sector contributes.to 57% of the GDP. Firms can set off service tax
against excise duty. Service tax revenues are part of the divisible pool of taxes shared
with states.

PUBLIC EXPENDITURE
Public expenditure refers to the total expenses incurred by the government on
various heads. Public expenditure can be classified as revenue or capital,
developmental or non-developmental and plan or non-plan.
(a) Plan Expenditure and Non-Plan Expenditure
Plan expenditure refers to tha t expenditure whose provision is made under the annual
budgets for those programmes and projects which are mentioned under the five year
plans. It includes expenditure on energy, social services, communication, transportation,
agriculture, rural development etc.
Non-Plan expenditure refers to that expenditure whose provision is made under the
annual budgets on the items not included in the five-year plans. Simply, any expenditure
other than plan expenditure is treated as non-plan expenditure. It includes expenditure
on defence, interest payments, subsidies, expenditure on maintenance of existing
assets, expenditure on tax collection etc.
(b) Developmental and Non-Developmental Expenditure
Developmental expenditure relates to the growth and development activities of the
government. This includes expenditure on education, health, industry, agriculture,
transport, roads etc.
Non Developmental expenditure is incurred on those items which do not directly promote
growth and development of the economy. It includes expenditure on defence, interest
payments, tax collection charges, civil administration etc.

Expenditure Reforms Commission (ERC)

It was constituted in 2000 under the chairmanship of Mr. K.P. Geetha Krishnan for
suggesting means to control public expenditure. The commission recommended to
reduce public expenditure in respect of the following (a) Food subsidy (b) Fertilizer
subsidy (c) Government staff.

SUBSIDY

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Subsidies are government grants to the producers, and suppliers of goods and services.
Such grants are intended to keep the price down, to maintain income of producers or to
maintain service or employment. Subsidies also refer to the unrecovered cost in the
provision of non-public goods.
The estimation of subsidy is entrusted on National Institute of Public Finance and Policy
(NIPFP). In 1997, it published a 'white paper on subsidies' which defined subsidies as
'economists nighmare and politicians delight'. It categorised the subsidies into these
categories :
(1) Public Goods: Such goods satisfy collective or social wants in general like defence,
police and general administration etc. Since they are very general and for everybody,
therefore, technically subsidy for them is not calculated.
(2) Merit Goods:- Subsidy on such goods benefits the society much more than it
benefits an individual eg. primary education, public health, sewage and sanitation, flood
control etc.
(3) Non-merit Goods:- Subsidy on such goods benefits the individuals or groups more
than the society as a whole eg. higher education, food subsidy, fertilizer subsidy, road
transport subsidy etc.

PUBLIC DEBT
Public debt refers to the total accumulated borrowings of the government. Public debt
includes internal debt comprising borrowings inside the country like market loans,
compensation and other bonds, treasury bills, special securities issued to the RBI as
well as non-negotiable non-interest bearing rupee securities issued to the international
financial institutions. External debt comprises of loans from foreign countries and from
international financial institutions like WB, IMF, ADB etc.
The other liabilities include outstandings against various small saying schemes,
provident funds, securities issued to IDBI, UTI and nationalised banks, deposits under
special deposit schemes, reserve funds and deposits. While 'public debt' obligations are
raise on the security of consolidated fund of India and are repayable out of it, 'Other
liabilities' are payable out of Public Account Fund of India.
Public Debt and Other liabilities of Government of India (At the end of March)

Debt of State Governments

The state govterments can borrow under Article 293 of the constitution upon the security
of their respective Consolidated Funds. A state can borrow only within the territory of
India. The composition of the debt of the state governments is as follows:-
1. Internal Debt.
(a) Market loans and Bonds
(b) Ways and Means Advances from RBI
(c) Loans from Banks and other institutions
2. Loans and Advances from the centre
3. Provident Funds etc.

Explicit Subsidies: The estimates of such subsidies can be pre-assumed and

calculated eg. food, fertilizer petroleum subsidy etc.
Implicit Subsidy: The estimate of such subsidy can not be made precisely in advance.

Debt Trap: It is a situation in which a debtor is unable to meet the obligation of debt
servicing, without borrowing or rescheduling the repayment obligations.

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External-Debt Trap
It is a situation when a country is forced to curtail its essential imports or to restructure
external debt in order to meet the payment of interest or repayment of principal on
external debt.